More of the same - but reason for optimism

After a shocking week previously, the US market managed to regain some lost ground through to Thursday despite a raft of disappointing economic data results.

Consumer sentiment came in well below the consensus, dropping to its lowest level since October 1992. Meanwhile an Index of manufacturing activity also disappointed, as did the Commerce Department's most recent durable goods report which showed that new orders fell 0.5 percent in April.

The news wasn’t all bad though. Quarterly GDP saw an upward revision, coming in with an annual rise of 0.9%, and oil prices moderated to a degree which also acted to lift confidence. And while the S&P/Case-Shiller Home Price Index plunged to a low of -14.4%, new home sales numbers in May showed a surprise 3.3% jump in purchases thanks to a considerable revision to the previous month’s reading.

On the corporate front, US financials got a boost from an increased earnings forecast from Mastercard. The credit and debit card processor said it expects double-digit net revenue growth for 2008 and lifted its long-term profit outlook, and that was enough to improve sentiment across the sector.

Asia

In Australia the lower price of oil actually acted to weigh on the market by weeks end, due to the heavy weighting of resource related stocks in the S&P ASX 200 index.

However the market managed to move away from its Wednesday low, thanks in part to some encouraging data. The Westpac Leading Index for March rose for the first time in three months to boost expectations of strong growth trends, while the first quarter construction activity report met its forecasted 2.3 percent rise.

In Japan, Government data showed that inflation is in much better shape than in other parts of the world, with the annual figure dropping to 0.9% through to April. Industrial output was however lower, although in line with expectations with a drop of 0.3% in April.

The market in Japan did however fair pretty well over the week, due in large part to the strong performance of exporters which found strength in a rebound of the US greenback against the yen.

Europe

European markets also saw their share of disappointing economic data, however the German economy did see some encouraging signs. Readings of growth confirmed the economy was in good shape, with GDP surging 1.5% through the first quarter, which was the quickest period of expansion in 12 years. Other positive news came in the form of strong numbers for construction activity and business investment.

Across the Channel though, it seems that tighter lending standards and weakening consumer confidence are taking a toll on the UK housing sector. The number of Mortgage approvals did manage to climb away from their record low in April, but nonetheless remain a good 40% below last year’s level.

Although an easing in the price of oil was welcome news for European investors, leading market indices for the region failed to see any significant improvement, with most hovering near a one month low through to Thursday.

Summary

We continue to see signs of slowing economic growth around the world, but it's becoming increasingly clear that although housing, credit and inflation related data is painting a gloomy outlook, other sectors seem to be holding up rather well.

Equity markets are mostly reflecting this, with all the major global indices remaining well above the yearly lows struck in March. The view at present seems to be that while we will see a slowdown, and possibly even a mild recession in some parts, there is somewhat of a dichotomy. Sectors such as housing, retail and finance are being seen as areas to avoid, while energy, resource and even technology sectors are being viewed with more optimism.

In essence it’s a buyers market, but it’s the discerning buyer that will do best. Investors will benefit from a fundamental focus and a medium to long term perspective. As for the traders, volatility is what it’s all about, and we are certainly likely to continue to see plenty of that for some time.